Solid jobs growth for US spreads optimism

Pimco co-founder Bill Gross rated the odds of a December taper “at least 50-50 now” in an interview with Bloomberg.
Photo: Bloomberg

by
Vesna Poljak

Australian stocks are poised to rise on Monday after the United States beat expectations on the critical November jobs reading and unemployment in the world’s biggest economy fell to a five-year low, building the case for a ­reduction in stimulus later this year.

Wall Street snapped its four-day ­losing streak on Friday as traders became more open to the idea of the Federal Reserve slowing down the $US85 billion in monthly bond ­purchases that underpin its quantitative easing program.

Markets have been anticipating the winding down of Fed stimulus since May, when outgoing Fed chairman
Ben Bernanke
first flagged an exit, but signs that tapering is imminent are usually met with selling in equities markets as investors fear the loss of policy support.

The reaction by the S&P 500 and the Dow Jones Industrial Average, which each rose more than 1 per cent, may suggest that markets are more receptive to evidence the US economy is firmly in recovery.

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Futures indicate the S&P/ASX 200 Index will rise 0.5 per cent when trading reopens after closing at 5186 points on Friday. The Australian dollar is fetching US91¢.

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Aquasia credit strategist Mark ­Bayley said a strong November jobs print still might not be enough to sway policy at the Fed’s December 17-18 meeting because while the employment trend was positive, the broader suite of US data was still weak in pockets.

At 7 per cent, the US jobless rate is at its lowest level since November 2008 when it stood at 6.8 per cent before ­rising to as high as 10 per cent as the financial crisis played out.

However, retail sales and economic growth undermine the case for a December taper.

Black Friday falters

Black Friday sales, the historical ­calendar peak for retail spending after the Thanksgiving holiday, were ­underwhelming and the personal ­consumption component of third-quarter gross domestic product was poor, with a slower rate of increase than in the ­second quarter.

“I still can’t see the Fed tapering in December. I’m still in camp of the first quarter of 2014 at the earliest," Mr ­Bayley said. “I just don’t think they would want to be seen withdrawing support for the market at a critical period of economic recovery in the States especially given the weak retail sales that we seem to be getting from the weak Black Friday weekend . . . The consumer is 70 per cent of the US economy. It’s a bit like the Australian economy, what’s going to pick up the slack?"

A further round of talks to settle America’s debt ceiling are due in the new year and the Fed correctly anticipated the disruption this caused when it declined to taper in September ahead of the October partial government shutdown. The central bank could take the same view and hold out until Washington has a fresh agreement on the US borrowing authority.

Still, Pimco co-founder Bill Gross rated the odds of a December taper “at least 50-50 now" in an interview with Bloomberg. Investment in the real economy was still lacking, he added.

Aquasia’s Mr Bayley theorised that when the reduction in stimulus finally comes the Fed could be flexible in responding to unforeseen weakness in the economy and bump up asset ­purchases when needed.

A non-linear approach

“I can even envisage the situation where the Fed starts to taper . . . and they say ‘OK the economy’s looking a bit dodgy we might go back up to $US85 billion’. They’ve said that it might not happen in a straight line," he said.

Department of Labor figures showed 203,000 new jobs were created in November, lifting average monthly employment growth to 195,000 over the past 12 months. A rise in the participation rate was encouraging.

ANZ Banking Group chief economist Warren Hogan said a December taper couldn’t be ruled out.

“A lot of the conditions that ­Bernanke originally put forward . . . are there. I wouldn’t be surprised, that being said, the key sector of the economy in the US that’s not improving is the residential construction and they need that."

In Australia, unemployment figures are due on Thursday. Economists ­forecast a 5.8 per cent outcome compared with the 5.7 per cent recorded in October. A weak result will give further ammunition to the handful of economists who still think the Reserve Bank of Australia has further easing to do.

The next RBA meeting is scheduled for February.

“I think the economy is going to ­generate jobs before too long but whether we see that with this report [remains to be seen]," said ANZ’s Mr Hogan.

“We think [the RBA is] done and the non-mining economy’s starting to turn the corner and we’ll start to see the jobs come through in 2014."

As well as a desired pick-up in home building jobs, “we’re going to need to see the services sector start to invest and expand again if we’re going to see the economy recover," he said.

Bad week for local stocks

Local stocks capped off their worst week since the start of June on Friday, falling 2.5 per cent over the five trading days. (They lost 3.8 per cent the week ended June 7, 2013.)

One fund manager said it was ­unsurprising that prices were falling after a strong run but whether this is the start of a downturn for some sectors is unclear.

Shares have risen in nine of the past 14 weeks since the start of September.

“Most stocks have been looking toppy for the past few weeks and have been trading above their valuations," WaveStone Capital portfolio manager Catherine Allfrey said.

“The market has had a great run and had to have a breather. The yield trade has been underperforming but stocks that source their profits offshore and resources should be OK as it’s a natural hedge for them as the Australian dollar falls. But banks, utilities, and yield plays are all underperforming and that trend could continue."

Consumer discretionary stocks have dominated the ASX 200 this year, with gains of 30 per cent for the sector, ­followed by financials and information technology which have delivered returns of 20.9 per cent and 21.4 per cent respectively.

Shares of QBE Insurance Group, the $19 billion global insurance giant, are due to resume trading on Monday after the company updates investors on its financial forecasts for the ­calendar year.